Why Did the FCC Adopt an Unusually High Reserve Price for the H Block Spectrum Auction?

by on October 3, 2013 · 0 comments

It could be argued that the exact match between the DISH bid commitment and the H block reserve price is purely coincidental. To actually believe this was a coincidence would require the same willing suspension of disbelief indulged by summer moviegoers who enjoy the physics-defying stunts enabled by computer-generated special effects. When moviegoers leave the theater after watching the latest Superman flick, they don’t actually believe they can fly home.

The FCC’s Wireless Bureau recently adopted an unusually high $1.564 billion reserve price for the auction of the H block spectrum. Though the FCC has authorized the Bureau to adopt reserve prices based on its consideration of “relevant factors that could reasonably have an impact on valuation of the spectrum being auctioned,” it appears the Bureau exceeded its delegated authority in this proceeding by considering factors unrelated to the value of the H block spectrum that have the effect of giving a particular firm an advantage in the auction. Specifically, the Bureau considered the value to DISH Network Corporation of amendments to FCC rules governing other spectrum bands already licensed to DISH (e.g., the 700 MHz E block) in exchange for DISH’s commitment to meet the $1.564 billion reserve price in the H block auction – a commitment that is contingent on the FCC Commissioners amending rules governing multiple spectrum bands no later than Friday, December 13, 2013.

No matter what the FCC Commissioners decide, if the reserve price stands, the only sure winner would be DISH. If the FCC Commissioners  don’t endorse the DISH deal, DISH need not honor its commitment to meet the artificially inflated reserve price, which could result in the spectrum auction’s total failure. If the Commissioners do endorse the DISH deal, the artificially inflated reserve price could deter the participation of other bidders and lower auction revenues that are expected to fund the national public safety network. Neither option would result in an open and transparent auction designed to provide all potential bidders with a fair opportunity to participate.

The FCC would be the only sure loser. The appearance of impropriety in the H block proceeding could compromise public trust in the integrity of FCC spectrum auctions. To ensure the public trust is maintained, the FCC Commissioners should thoroughly review the processes and procedures implemented by the Wireless Bureau in this proceeding before auctioning the H block spectrum.

The following discussion provides background information on the purposes of spectrum auctions and reserve prices. This background information is followed by a more detailed analysis of the terms of the DISH deal and the advantages it would bestow on DISH, the lack of analysis in the Wireless Bureau’s order, the role of the Commissioners, and the potential damage to the integrity of FCC auctions. Continue reading →

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Some quick thoughts on Silk Road’s demise and what it means for Bitcoin

by on October 2, 2013 · 0 comments

As you know doubt have heard, Silk Road has been shut down by the FBI and its alleged operator, Ross Ulbricht, has been arrested. I’ve been getting a lot of questions about this and what it means for Bitcoin. Here are some initial thoughts.

The price of Bitcoin is dropping. What does that mean? It means that speculators are speculating. That said, here’s how I’m going to read it: If the main value of Bitcoin is that it can be used to buy drugs on Silk Road (as some contend), then we should see the value drop to zero is short order. If Bitcoin has other value, we should see it weather this jolt. One year ago a Bitcoin traded for about $14. As I type this, it’s hovering at about $118 $127.

How did they catch the guy? Good question. I don’t know the answer, but that won’t stop me from speculating. I will point out two things. First is this from the criminal complaint against Ross Ulbricht:

During the course of this investigation, the FBI has located a number of computer servers, both in the United States and in multiple foreign countries, associated with the operation of Silk Road. In particular, the FBI has located in a certain foreign country the server used to host Silk Road’s website (the “Silk Road Web Server”). Pursuant to a mutual Legal Assistance Treaty request, an image of the Silk Road Web Server was made on or about July 23, 2013, and produced thereafter to the FBI.

OK. So how did the FBI “locate” the servers that hosted the Silk Road Tor hidden service? The FBI has recently admitted that they have exploited vulnerabilities in Tor to identify users. Could it be that they exploited some vulnerability in this case? I look forward to finding out.

That said, here is another possibility. Also according to the criminal complaint (emphasis added),

On or about July 10, 2013, [Customs and Border Patrol] intercepted a package from the mail inbound from Canada as part of a routine border search. The package was found to contain nine counterfeit identity documents. Each of the counterfeit identification documents was in a different name yet all contained a photograph of the same person.

That person was Ulbricht and the package was addressed to him. Maybe it was from this lead that the FBI was able to begin the process of identifying the servers, once they had a suspect. If so, and if this indeed was a “routine” search, then the authorities got completely lucky!

Finally, I’ll point out that Bitcoin was in no way involved in the identification of the suspect. In fact, in the criminal complaint the FBI argues that because the blockchain (Bitcoin’s public ledger) is pseudonymous, that it is not useful in tracing transactions. I don’t think that’s quite right, but that’s how the FBI sees it in this case. So, in this case at least, the privacy Bitcoin affords was not compromised in any way.

UPDATE: As I think about this some more, it’s clear that the FBI was able to identify Ross Ulbricht because he posted his Gmail address to the Bitcoin Talk forum using the same username that first mentioned Silk Road ever. So, what are the chances that the CPB search that turned up the package of fake IDs bound for Ulbricht was routine? If it was routine, it was routine in the sense that packages to people on a watchlist might be routinely searched. I’m still not clear how the FBI got from identifying a possible suspect to locating the server for the Silk Road Tor hidden service.

How do you seize Bitcoins? I’m surprised by how many times I’ve been asked this question. It’s amazing what it is that people seize upon in a story. I don’t know how the authorities have carried out the seizure, but it’s not to difficult to conceive how it could be done. Basically they would have to get the private keys to the suspect’s Bitcoin addresses. (Think of it essentially like getting the password to an account.) They could either get that with his cooperation or if he had stored it somewhere now accessible to the authorities. Once they have the private keys, they would be able to transfer the bitcoins and I imagine that they would transfer them to a Bitcoin address that only they control.

UPDATE: So I got ahold of the seizure order and indeed I was correct that this is how the government will try to go about seizing the bitcoins. From the court order:

The United States is further authorized to seize any and all Bitcoins contained in wallet files residing on Silk Road servers, including those servers enumerate in the caption of this Complaint, pending the outcome of this civil proceeding, by transffering the full account balance in each Silk Road wallet to a public Bitcoin address controlled by the United States.

But to be clear, to seize bitcoins you do need to get the “password” that controls them. You can’t just go to an intermediary and order that an account be frozen as you can do with traditional financial intermediaries like banks or PayPal.

I’ll be tweeting and posting more as I learn more about what happened, but those are my initial thoughts. Shoot me any questions or thoughts you have. I’m at @jerrybrito on Twitter. And by the way, you can follow all the coverage of the Silk Road arrest and seizure on my site Mostly Bitcoin.

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The FTC should provide ammo for software patent abolitionists

by on October 2, 2013 · 2 comments

Last week, the FTC proposed to use its Section 6(b) power to investigate patent trolls. Its clear from the agency’s comment request that what they’re really interested in examining is the practice of patent privateering.

For The Umlaut, I wrote an article explaining what patent privateering is and how it upsets the fragile state of affairs in the software industry.

Because patent trolls are non-practicing, they are not subject to threats of counter-suit and mutually assured destruction. Because they are not members of any SSOs, they do not have any obligation to license on a FRAND basis; standard-essential patents can be transferred to privateers and then asserted against all users of the standard. And because the transfer of patents to patent trolls is often done through various shell companies or other shadowy means, the defendant and the public often cannot know on which practicing software company’s behalf the privateer is working. This means the defendant cannot retaliate through countersuits or a public relations offensive.

I think that understanding how patent privateering actually works and how it disrupts companies’ attempts to innovate makes one much more sympathetic to simply abolishing software patents outright. Given that the practice is  not widely understood, the FTC could add value by simply disseminating information about it to a wider audience. I don’t think that the FTC has the authority to regulate patent enforcement, since patent rights are explicitly authorized by Congress, but they can and should send Congress the message that software patents are being used to stifle innovation, not promote it.

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Mel Watt proposes true Internet radio fairness

by on October 1, 2013 · 0 comments

Over the past year, as the debate over internet radio royalty rates has raged, I have been a lonely voice calling for the repeal for compulsory licensing of digital performance rights altogether. I did so at the Cato event for my book, Copyright Unbalanced, in January at a State of the Net panel, and in my Reason column. The reaction I often received was either one of outrage by the Pandoras of the world, or condescension for my naive optimism. Well, optimism can pay off. Yesterday Rep. Mel Watt, ranking member of the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet, introduced the “Free Market Royalty Act,” which among other things gets rid of compulsory licensing.

The problem with the compulsory licensing scheme is twofold: Not only does it rely on federal bureaucrats to set the rates that artists must accept for their music (rather than allowing a free-market negotiation take place between copyright holders and those who want to broadcast their songs), but it also allows Congress to pick winners and losers by assigning different royalty rate standards to different users. As I explained in Reason:

While AM, FM, cable and satellite radio, and Internet radio services like Pandora can all opt for compulsory licenses, they each pay different royalty rates. The rates are set by a panel of government lawyers called the Copyright Royalty Board, and they have the effect of favoring some business models over others. Internet radio services pay over 60 percent of their revenue in royalties, while Sirius XM, the only satellite radio company, pays only 8 percent. AM and FM radio aren’t subject to a digital sound recording right, so it pays zero.

Watt’s bill would blow all this up, making terrestrial broadcasters, Internet radio services, and the rest to give up their price-fixed compulsory licenses and have to negotiate in a market the rates they pay. This truly levels the playing field, especially vis-a-vis interactive music services like Spotify and Rdio that have never benefited from compulsory licenses.

Whether you talk to supporters of Rep. Chaffetz’s Internet Radio Fairness Act or Rep. Nadler’s Interim FIRST Act, they each will say their bill is the true fre market approach, and that their rate-setting standard would best approximate a market. To them I say, nothing better approximates a market than the market itself, so if they are truly concerned about ensuring a free market level playing field, here is the way to do it.

One advantage of compulsory licensing is that it can reduce transactions costs. The Watt bill retains some of this advantage by designating SoundExchange, a nonprofit agency, as the common agent for copyright owners to facilitate negotiations, but allowing labels and artists to retain the right to opt-out and negotiate on their own. If this bill passes, I think we’ll see some very interesting experimentation with business models on the part of both the artists and the radio stations.

Finally, looking at the) press coverage of this bill, what has gotten the most attention is that it would, for the first time, require terrestrial AM/FM radio stations to negotiate and pay royalties for the sound recordings they broadcast. The way I see it, it’s not clear to me why broadcasters deserve yet another subsidy, so I shed no tears for them if this bill passes. Broadcasters argue that they provide promotional value for the songs they broadcast, that this benefits copyright holder, and that they should therefore continue to pay nothing. If it is indeed the case that airplay provides substantial promotional value, that will be taken into account in the course of negotiations and we should expect the ultimate rate to reflect that. Indeed, you can even imagine an outcome where the free market rate for terrestrial stations would remain at zero, or even that copyright holders would want to pay the stations. That’s the beauty of the market, so let’s unleash it.

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Randall Stross on Y Combinator

by on October 1, 2013 · 2 comments

Randall Stross discusses his recent book: The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups. Stross’s behind-the-scenes look at Y Combinator details how the seed fund has been able to produce young entrepreneurs and successful startups such as Dropbox and Airbnb. Stross also discusses Y Combinator’s early history, the typical Y Combinator participant, the fund’s rate of return, the gender gap in the program, and the reason Silicon Valley has become the epicenter for startups.

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California Eraser Button Passes

by on September 26, 2013 · 2 comments

California’s continuing effort to make the Internet their own digital fiefdom continued this week with Gov. Jerry Brown signed legislation that creates an online “Eraser Button” just for minors. The law isn’t quite as sweeping as the seriously misguided “right to be forgotten” notion I’ve critique here (1, 2, 3, 4) and elsewhere (5, 6) before. In any event, the new California law will:

require the operator of an Internet Web site, online service, online application, or mobile application to permit a minor, who is a registered user of the operator’s Internet Web site, online service, online application, or mobile application, to remove, or to request and obtain removal of, content or information posted on the operator’s Internet Web site, service, or application by the minor, unless the content or information was posted by a 3rd party, any other provision of state or federal law requires the operator or 3rd party to maintain the content or information, or the operator anonymizes the content or information. The bill would require the operator to provide notice to a minor that the minor may remove the content or information, as specified.

As always, the very best of intentions motivate this proposal. There’s no doubt that some digital footprints left online by minors could come back to haunt them in the future, and that concern for their future reputation and privacy is the primary motivation for the measure. Alas, noble-minded laws like these often lead to many unintended consequences, and even some thorny constitutional issues. I’d be hard-pressed to do a better job of itemizing those potential problems than Eric Goldman, of Santa Clara University School of Law, and Stephen Balkam, Founder and CEO of the Family Online Safety Institute, have done in recent essays on the issue. Continue reading →

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Why the FCC should stay out of cell phone unlocking

by on September 25, 2013 · 0 comments

Earlier this week NTIA petitioned the FCC to adopt a rule requiring wireless carriers to unlock the cell phones of customers and former customers who request it, and today the New York Times editorialized in support. While such a rule would solve the immediate problem of cell phone unlocking, it would be a band-aid solution that avoids dealing with the real problem: the DMCA’s anti-circumvention provisions.

As I’ve explained before, the cell phone unlocking issue is just one symptom of a greater problem, namely that it is illegal for you or any third party you contract to unlock content that you own. This affects not just phones, but also e-readers, music and video players, and even garage door openers and printer cartridges in the view of some. So I have to disagree with CDT when it says, “Perhaps the best feature of the NTIA’s approach is that it skips the absurd debate over copyright and DMCA exemptions and treats phone unlocking as what it is – a telecom issue.”

Cell phone unlocking, despite what the name might lead you to think, is not a telecom issue; it’s a DMCA issue. You can see this if you think about all the restrictions that remain in place even if the FCC were to adopt the NTIA’s proposed rule. For example, the rule forces carriers to unlock your phone at your request, but it would still be illegal for you to unlock your own phone, or to have a third party (such as a competing carrier that wants your business) unlock your phone.

Bottom line: It’s really strange to solve a problem created by Section 1201 of the DMCA by turning to the FCC to force carriers to give up their rights under the DMCA. Indeed, it removes a contractual possibility from the market because under the rule a carrier could no longer contract with a consumer to keep the phone unlocked for the duration of the contract. That’s an option that should be available to carriers and consumers. Any fix to this DMCA-created problem must leave the freedom to contract alone. The better way to address cell phone unlocking is to have the FCC stay out of what is an issue that Congress needs to address. Rep. Lofgren’s Unlocking Technology Act, for example, does just that.

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Bob Goodlatte is on a quest to slay trolls, but will he crush the source of their power?

by on September 24, 2013 · 0 comments

The new discussion draft from Rep. Goodlatte is now circulating publicly. Here is a good summary from the EFF of what the legislation would do:

  • Heightened Pleading: Requiring a patent holder to provide basic details (such as which patents and claims are at issue, as well as exactly what products allegedly infringe and how) when it files a lawsuit.
  • Fee shifting: Requiring the loser in a patent case to pay attorney’s fees and costs. This would make it harder for trolls to use the extraordinary expense of patent litigation to force a settlement.
  • Transparency: The draft includes strong language requiring patent trolls to reveal the parties that would actually benefit from the litigation (called the real party in interest).
  • Joinder: If the plaintiff is a shell-company patent troll, the defendant could require the real party in interest to join the litigation. Even better, a prevailing defendant could collect attorney’s fees from the real party in interest if the patent troll can’t or won’t pay.
  • Staying customer suits: Requiring courts to stay patent litigation against customers when there is parallel litigation against the manufacturer.
  • Discovery reform: Shutting down expensive and often harassing discovery until the court has interpreted the patent. This should make it easier for defendants to dispose of frivolous cases early before the legal fees and court costs really add up.
  • Post-grant review: The bill expands an important avenue to challenge a patent’s validity at the Patent Office (known as the transitional program for covered business method patents). While this procedure is still too expensive for many of the trolls’ smaller targets, we support efforts to make it easier to knock out bad patents.

These are excellent steps forward in the fight against patent trolls, but I’m still hoping for more. The explosion in patent litigation, both troll and non-troll, is due to the astonishing increase in the number of software patents. Software patents now make up over half of all patents! Software patents are more likely to be litigated than other kinds of patents, including four times more likely than a chemical patent.

Given the extent to which the problems with our patent system are caused by software patents, it is unfortunate that none of the patent reform bills under consideration in this Congress contemplate simply excluding software from the set of patentable subject matter. By all means, slay the trolls. But also go after the source of their power.

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Seriously Uncompromising

by on September 23, 2013 · 2 comments

Many “serious people” are beginning to make the case that it’s time for the outrage and indignation over the NSA’s mass surveillance to subside and give way to a “national conversation” about how much privacy and liberty we are willing to trade for security, which they argue is a “choice we have to make.” Today at Reason I argue that until we have good reason to trust the oversight mechanisms that we are told will keep the system honest—or indeed trust the mechanisms for formulating such an oversight regime—civil libertarians have no reason to feel sheepish about obstinately refusing to make that “choice we have to make.”

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Does search lead to piracy? Here’s why the new MPAA report isn’t clear

by on September 19, 2013 · 2 comments

Yesterday the MPAA issued a report commissioned from the global PR firm Millward Brown looking at “the role of search in online piracy.” This coincided with the RIAA’s Cary Sherman testimony before the House IP subcommittee that search engines are not doing enough to protect his industry from piracy. Here are some thoughts on the new report and the issue generally.

The report tries to ascertain how much of the traffic to infringing content is sent there by search engines. To measure this, the report employs “a customized, hybrid approach” that doesn’t merely look at whether the visit to an infringing URL came from a link on a search page. Instead, it looks at whether a user searched for a “qualifying” search term within 20 minutes of reaching the infringing URL. “Qualifying” search queries, the report says, are associated with attempts to find illegal content and include “domain terms like ‘1Channel’ and ‘sidereel’, generic terms like ‘watch movies online’ and movie and TV title-based terms like ‘Dark Knight Rises’.” As the report puts it, “This holistic approach contrasts with a more narrow definition that counts search only when a visit is preceded by a visit to a search engine.”

The report is clear that “this method did not seek to indicate the degree to which infringing content appears on search engine results pages themselves,” but merely sought to show that search engines “influenced the path” users took to reach infringing content. It concluded that “approximately 20% of all visits to infringing content were influenced by a search query from 2010-2012.”

I have a couple of concerns with this methodology. First is that it implicitly puts search engines on the hook not just for linking directly to infringing content (for which there is a notice-and-takedown process available), but also for “influencing the path” that a user takes on their web travels. As we all know, correlation is not causation, so it’s not clear to me that because I searched for “transformers” 15 minutes before I visited the URL for a pirate stream of Game of Thrones that necessarily means that the search engine influenced me in any way, and much less should be responsible for my behavior.

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